Posted by: Dirk | June 18, 2008

Transport costs on the rise: potential impact on global trade?

Transport costs are on the rise, according to Jeff Rubin and Benjamin Tal (Will Soaring Transport Costs Reverse Globalization?):

Globalization is reversible. Higher energy prices are impacting transport costs at an unprecedented rate. So much so, that the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today. In fact, in tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the last three decades. Not only does this suggest a major slowdown in the growth of world trade, but also a fundamental realignment in trade patterns.

The example of the authors is China’s steel trade with the US (see chart 6 above). Since higher transport costs makes it harder for Chinese steel to compete on the US market, Chinese exports to the US decline while domestic steel production there increases.  Rubin and Tal are very sure of their transport costs argument (see chart 5 in their article). Other reasons can be thought of, like a switch of demand from a US in economic downturn to a frantically building China, which is preparing to host the Olympics later this year.

This seems like an interesting development, although the authors’ seem to forget that transport costs include more things than freight & insurance plus shipping. David Hummels has the story (pdf):

Economic historians have argued that technological change in ocean shipping was the critical input to growing trade in the first era of globalization during the latter half of the 19th century. I would argue that technological change in air shipping and the declining cost of rapid transit has been a critical input into a second era of globalization during the latter half of the 20th century. There is perhaps a third era in cross-border trade unfolding even now, again driven by rapid improvements in a technology for connecting people across great distances. Clearly the telecommunications and internet revolution has already affected international integration, leading to growing trade in information and technology, in services outsourcing, and in migration of highly skilled professionals. The impact of these changes, and the extent to which they displace older forms of integration, bears close watching in the years to come.

A final note: transport costs are only one side of the medal, with transport quality being the other. Amazon.com has announced that it will stop sending goods to South African consumers since too many goods are lost in the postal service, according to Business Day.

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